Energy Worlds Apart
Recent publication of this year's BP Statistical Review of World Energy illustrates several mega trends in world oil and for energy in general. The Review provides time-series charts where the key change decade of 2003-2013 is covered. These underline how the primacy of oil is threatened. To be sure, wrong way data and false flag trends exist – for example and in particular that China and the US, the world's two biggest economies and two biggest oil importers, now import about a half of the oil they each consume and use.

Their combined total oil consumption now runs at slightly above 27 million barrels/day (Mbd). This is almost exactly 30% of all oil consumed worldwide but apart from that however, China and the US are literally worlds apart in energy – despite their converging twin track for imports.

Among major OECD economies the US is still the largest per-capita oil consumer at around 20 barrels per person a year. China despite its stupendous coal consumption (equivalent in oil terms to about 11.2 barrels per capita per year) - is now an oil-intense economy relative to other developing and emerging non-OECD countries. Relative to the OECD group however, it remains far behind. Despite (or rather because of) its growing oil imports, economic change, and other factors including energy policy China's growth of oil consumption is rapidly slowing. In the OECD group the main metric, almost everywhere, is the rate of decline in per capita and national oil and energy consumption.

While the OECD group is home to about 14% of the world's population but consume around 45% of world oil this particular crossover – the North/South split of world oil demand – has already happened. From 2005-2007 the 30-nation OECD group's oil consumption shrank below that of the emerging and developing South as the South's demand grows – but since 2012 at a slowing pace.

Global and national oil-intensity and energy-intensity trends are able to be calculated from BP's Review, showing that surely for the US and the OECD group declining oil and energy intensity is the major trend and could even be called “cast in stone”. Much more rapidly than most analysts ever forecast, the same decline trend may also be starting in the emerging economies, especially China.

Commercial and Strategic Security Stocks
To be sure, as the chart above shows, US and Chinese oil import crossover is coming. China will soon be a bigger net oil importer than the USA, making China the world's biggest single importer. As of present, their combined total net imports are close to 12.5 Mbd, roughly 24.5% of world net total oil imports but the decline trend for US oil consumption, its growing domestic oil production, and China's slowing growth of oil demand all suggest US import decline and Chinese import growth will likely cancel each other out. This suggest no net growth in oil imports by the world's two-biggest importers.

Backing this forecast which itself is bad for oil prices, their combined imports relative to the figure for world total net oil imports - about 51 Mbd – are not strictly comparable. The world net import number is “fuzzy edged” due to factors as wide ranging as ship and airline oil bunkering, world petrochemicals use (about 4.75 Mbd), world oil refinery gains, oil pipeline transit stocks, and both maritime and land tanker oil in transit. Other factors, on the upstream side include the basic definitions used for “oil”, (eg. NGLs or natural gas liquids), and the reporting of oil trade by different local, regional and international oil trade systems.

The major factor, here, is that net total commercial crude oil imports on a global basis are also very slow growing, like world oil demand, but are also almost certainly over-estimated. Also, commercial crude stocks and oil in transit are matched, and in many OECD country cases exceeded by strategic or national security oil stocks. For the IEA's OECD countries these stocks are mandatory and are reported by the IEA on a regular basis – but in several cases, most dramatically the USA – strategic stocks are massive, needing oil imports to maintain them at high levels. These imports can at any time decline, with a major negative impact on world demand for imported oil, and therefore prices. As we know, both China and India have made the political decision to also constitute and maintain strategic stocks – further raising their apparent need for oil and their import volumes. In the commercial stocks sector, both world shipping and aviation bunkering have grown to massive levels (about 2 billion barrels for ship bunkering, around 7% of world oil demand on a yearly basis). Decline of these stocks, with slowed growth or decline of shipping activity and more efficient LNG-fueled ships, and clean coal powered and windpower assisted ships, is highly possible or even likely.

Importers, Exporters and Re-exporters
Some energy journalist claim they are amazed that, until 1993, China was a net exporter of oil – but the US was for decades a large oil exporter, before becoming a massive but now declining importer. Taking other examples and relative to national oil consumption, we can cite Norway which was a large oil importer, for decades. The UK was a large net importer, became a short-lived small exporter, and is now poised to again be a net importer – depending on UK refinery trade and other factors (also including bunkering). Countries like Switzerland are very unlikely to ever produce serious amounts of oil, and will remain large oil importers. Countries like Singapore are also large importers, but in this case the city state runs a massive refining industry as well as operating the world's largest shipping hub. Singapore consumes around 190 million barrels a year only for bunkering its shipping hub, but obviously this oil is not consumed in Singapore.

Refinery operations and trade have themselves alone driven a horse and cart through pre-1990's oil metrics and world oil. Basically, world refinery capacity is far ahead of demand, and still increasing at several times the world's tiny annual growth rate for oil consumption, presently around 0.75% a year on average. Despite IEA and OPEC claims that 2014 “could see a major recovery of oil demand growth”, the yearly trend is also able to contract - anytime the global economy turns down. The 2008-2009 sequence of serial oil demand cuts showed this, but for some major regions – especially Europe - the decline of oil demand is now an 8-year-long trend. The net result, combined with oil stocks, both commercial and strategis is “false flag” consumption and demand data for a large number of both unsurprising, and surprising countries. China, for example, exactly like the US, is engaged in a petro-strategy of importing crude and re-exporting value added refined products – a strategy that in the EU28 and Japan has reached the limits of sustainability in economic and financial terms but as yet has not attained its inevitable industrial conclusion – further cutting European oil import demand.

Refining strategy also focuses the world's NOCs or national oil companies, sometimes based on large national oil reserves and production (like several OPEC states) but also including countries with a zero-base of oil reserves or production – like Singapore. One interesting effect is that the amount of crude oil in transit or stocked for refining has massively grown in the last 15 years, relative to “classic” consumption metrics only measuring final consumption. This “market overhang” is often ignored by oil analysts forecasting oil price changes only using “classic” metrics.

Not Only Oil
BP's Statistical Review, we might have guessed, gives limelight attention to oil but it cannot avoid giving us trend-setting data for world natural gas and coal. Black coal, apart from it still supplying around 67% of all energy consumed in China – incorporated in every single “Low Carbon” cellphone, solar cell and PC exported by China – basically shows the triumph of energy economics. While oil prices remain stubbornly high (after a short flirt with reality in 2008-2009), and gas prices everywhere outside the US remain stubbornly high, coal prices remain stubbornly low. Only because of this, coal demand is increasing, even in “Low Carbon” climate-conscious Europe!

Rates of global coal demand growth far outstrip oil demand growth, and since at latest 2010, world natural gas demand growth. Technology factors like extracting coalbed methane not black coal, and in situ gasification of coal, are likely to further “bring back coal”. However the plain fact is it never went away. Coal energy's role in world commercial primary energy is now only just behind oil (around 30% for oil and 29% for coal, and about 24% for gas) – signaling another big crossover is coming.

This is energy economics 101 or a return trip to the babyhood of Industrial Civilization but it sets a swirl of sub-trends with potential or probable large impacts on energy prices and trade going forward. In Europe for example, natural gas can't beat coal for power generating – and for Europe that mostly means imported coal, more expensive than local-produced when the financial and taxation overlay is stripped away. Conversely in the US, coal is beaten to a pulp by ultra-cheap domestic natural gas. The only salvation possible for the US coal industry, today, is exporting, notably to Europe in a global coal market that is more than well-supplied. Going forward, it is hard to see any serious uptick in world coal prices. With cheap coal energy, energy economics say that all other energy prices have to be dragged down, sooner or later. Not bolstered upward.

Although they only get small coverage in the BP Statistical Review, energy economics is going to seriously affect world, regional and national electric power. One simple figure can help explain this. In Europe today coal-fired power is growing due to “brute economics”, and the wildly dysfunctional EU28 Emissions Trading Scheme (ETS). Present state of the art ultra-clean coal plants can wrench and convert almost 50% of the chemical energy inside a ton of coal, producing electricity which in some countries – like star player Germany in Europe's energy transition quest – is sold to domestic users at about 25 euro cents a kiloWatthour. This uses imported coal (CIF price including transport for standard energy coal with 8000 kWh per ton) at the princely price of about 1.38 euro cents a kWh on a thermal basis before its “upgrading” to electricity.

In theory only, this seems like nice business for generators – but not too good for consumer morale and downright bad for electricity demand!

Despite and because of this, and also due to factors including power company corporate lethargy, climate policy blunders and the parasitic antics of the finance industry, however, all of Germany's Big Four power producers like most other generators in Europe continue to emit dire warnings of financial doom, extending to claims they might totally abandon all production of electricity – at least in Germany, unless ETS is reformed. Put another way, electricity like oil has been heavily overpriced, but in the case of electric power the benefits to any major sector of the business or private communities are either low or zero.

Germany's Energiewende transition plan basically only concerns electricity and is based on overpricing it, like its clones in other EU28 countries. Simply because of this energy economics 101, the future of European energy transition is apt to change fast, but under almost any hypothesis we cannot forecast any recovery in German and other European oil demand – and possibly even gas demand. The energy-saving trend is now hard-wired in nearly all developed-OECD countries. Very simply it will first and most affect the most-overpriced forms and types of energy.

Tough Times Coming for Oil Producers
BP knows plenty about this but avoids talking about it – it leaves its high price lawyers and the financial press to do the dirty work. Basically there are now nearly as many reasons to not produce oil, as produce it and run the risk of “unexpected non-performance” in financial, technical, energy economic, environmental and industrial terms. Shell also knows plenty, having unveiled its “global gas strategy” at the start of the 2000's as a strategic shift away from oil, to gas. Due to unexpectedly high development costs and unexpectedly slow-growing gas prices- - and a rout in US domestic gas prices due to the shale gas boom since 2009 – Shell's Go For Gas strategy is now something of a shambles.

On technical grounds, the so-called “historic oil majors” have low or small reserve-to- production bases (years of current production from official proven reserves), and have increasingly high cost oil production profiles – totally unlike a large number of NOCs, not only in OPEC countries. The writing on the wall, here, is for the “historic majors” to slowly quit the business of extracting and producing oil, and focus other energy and the downstream value-add sector.

Most international oil majors, and some NOCs have the same problem, but at present and for as long as high oil prices exist they mostly soldier along with uber-conventional oil production strategies – but often tapping “unconventional oil” with all its risks and perils - for example Italy's ENI. Unfortunately for their financial performance, their downstream refining and petrochemicals strategies, supposedly value-adding, have also been weakened by straight overcapacity, and in some cases have started being abandoned due to the ironclad upstream context of ultra-slow global oil demand growth. Quitting the oil business, and even the entire energy business is certainly tossed around in boardroom brainstorming sessions on a regular basis, although it is usually denied.

Reducing this to a single number, oil prices at less than about $70-per-barrel on a lasting basis will trigger a tidal wave of pent-up financial and industrial change in the world oil patch. BP's Review skates away from showing us charts and data on worldwide true-basis oil production costs, but the oil industry now needs high or very high oil prices on a historic basis, simply to survive. As already mentioned, oil energy is uber-expensive compared with coal, (and compared with gas energy in the US), meaning that for example oil's share of world energy has to go on declining, and any prolonged decline of world oil prices will have massively negative ripple effects across the oil industry.

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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